20180723-Maybank_KERPL-UltraTech_Cement__UTCEM_IN__Strong_Volume-Led_Growth_12页_600kb

UltraTech Cement (UTCEM IN) Summary

Core Content

UltraTech Cement (UTCEM) reported its 1QFY19 EBITDA at INR16.9b, which was in line with forecasts and Street estimates. The company experienced a strong 33% YoY volume growth, primarily due to the contribution from the JPA assets, which were merged in Jun 2017. This growth is expected to continue with a projected 8-9% industry volume growth over the next 2-3 years, driven by the highway program, improved mining conditions, and government incentives for affordable housing.

The company's EBITDA per ton (EBITDA/t) was INR966 in 1QFY19, flat QoQ, despite rising petcoke and diesel prices. UTCEM has managed to offset these costs through the installation of waste heat recovery units and expects to narrow the profitability gap of acquired assets by at least INR50/t from 3Q. The blended selling price increased sequentially and is expected to support profitability expansion.

Key Financials

Price Targets and Valuation

• Current Share Price: INR 3,884
• 12m Price Target: INR 4,765 (+23%)
• EV/EBITDA (FY20E): 12.5x
• Valuation: Trading at 12.4x FY20E EV/EBITDA, which is 20% below its long-term average of 16x. The stock is expected to trade near its long-term average due to aggressive expansion and growth.

Acquisition Updates

• Century Textiles Demerger: Approved on 20 May 2018, adding 11.4mtpa capacity to UTCEM. The transaction is expected to complete in 6-9 months and will increase UTCEM's capacity to 105.9mtpa (excluding 1.2mtpa pending statutory clearance).
• Binani Cement Acquisition: UTCEM won the bid with an offer of INR79.6b for 11.25mtpa capacity, increasing its capacity to 92.5mtpa by FY20. This acquisition is still under review by the National Company Law Tribunal.

Capacity and Growth

• UTCEM commissioned a second grinding unit of 1.75 mtpa in Jun 2018, increasing its capacity to 88.5mtpa.
• Expected to commission a 4 mtpa unit in Bara, Uttar Pradesh in Jun 2019, taking capacity to 92.5mtpa.
• The company is working on five waste heat recovery projects to improve efficiency and reduce costs.

Financial Highlights

• FCF: Turned positive in 1QFY19 after being negative in FY18. Expected to continue positive in the rest of the year.
• Debt/EBITDA: Expected to decrease from 3x in FY18 to 2.4x in FY20E, though may rise due to pending acquisitions.
• ROE: Projected to improve to 14.7% in FY20 due to higher operating leverage and better asset turnover.

Price Drivers and Swing Factors

Upside

• Operating Leverage: High capacity to benefit from demand improvement.
• Cost Optimization: Improved kiln fuel mix and lower lead distance will help reduce fuel and freight costs.

Downside

• Housing and Infra Demand: No pick up could negatively impact performance.
• Commodity Prices: Inability to pass on increased costs could affect margins.
• Cement Prices: Sharp downwards correction may reduce profitability.
• Interest Rates and Rupee Depreciation: Potential issues due to rising costs and financial pressures.

Value Proposition

• Market Position: Largest cement manufacturer in India with 68mtpa capacity in FY17A, rising to 92.5mtpa by FY20.
• Product Range: Produces white cement and putty.
• Brand Strength: 'UltraTech' brand enjoys a price premium over peers.
• Growth: Domestic capacity has increased tenfold since FY98, with growth from both organic and M&A activities.

Peer Comparison

Conclusion

UTCEM is positioned for continued growth with strong volume-led expansion and strategic acquisitions. Despite rising input costs, the company has managed to maintain profitability through cost optimization and efficiency improvements. The stock is expected to outperform with a price target of INR4765, reflecting its strong fundamentals and growth potential. However, risks remain if demand for housing and infrastructure does not improve, or if the company fails to pass on cost increases effectively.